CP16/23 – Updating UK Technical Standards on the identification of global systemically important institutions (G-SIIs)

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Responses are requested by Tuesday 29 August 2023.

Please address any comments or enquiries by email to:
CP16_23@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:
Vasilis Jacovides
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

1. Overview

1.1 The Basel Committee for Banking Supervision (BCBS) implemented changes in 2022 to its framework for assessing the systemic importance of global systemically important banks. This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposed updates to the UK methodology for the identification of, and setting of a capital buffer for, global systemically important institutions (G-SIIs), to be in line with the BCBS framework.

1.2 The proposals in this CP would result in changes to the UK Technical Standards^{footnote [1]} (the UKTS) for the methodology used to identify G-SIIs^{footnote [2]} (Appendix 1). This CP sets out policy proposals to align the UKTS with updates made to the BCBS framework.

1.3 The PRA’s proposals aim to maintain the alignment of the UKTS with the BCBS framework. Identifying and setting an additional capital buffer for G-SIIs in accordance with the BCBS methodology developed at international level advances the PRA’s primary safety and soundness objective. It does this by helping to ensure G-SIIs hold appropriate levels of capital, in line with the greater costs of their distress or failure to the financial system and economy. Ensuring consistency with the BCBS framework also provides clarity to firms and avoids incurring any duplicative operational costs for firms and the PRA.

1.4 The CP is relevant to PRA-authorised UK headquartered banks, building societies, PRA-designated UK headquartered investment firms, and their qualifying parent undertakings.^{footnote [3]} The CP is particularly relevant to UK headquartered firms in scope of supplementary reporting for the purposes of identifying and assigning G-SII buffer rates.

1.5 The PRA has a statutory duty to consult when introducing new rules (s138J of the Financial Services and Markets Act (FSMA) 2000), or new standards instruments (FSMA s138S). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so. 

1.6 In carrying out its policymaking functions, the PRA is required to comply with several legal obligations. Appendix 2 lists the statutory obligations applicable to the PRA’s policy development process. The analysis in this CP explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals.

Implementation

1.7 The PRA proposes that the implementation date for the changes resulting from this CP would be the date of publication of the final revised UKTS.

Responses and next steps

1.8 The PRA considers it appropriate to conduct a consultation for a shorter period than the usual three months because the proposed amendments to the UKTS would only implement changes already published by the BCBS and known to the public.

1.9 This consultation closes on Tuesday 29 August 2023. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to
CP16_23@bankofengland.co.uk. Please indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

1.10 Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law.^{footnote [4]}

2. The PRA’s proposals

Updates to the UKTS

2.1 The BCBS framework for assessing the systemic importance of the largest firms globally uses an indicator-based measurement approach. The indicators are chosen to reflect the different aspects of what makes a bank critical for the stability of the financial system as a whole. These indicators are grouped under five equally weighted categories of systemic importance which are:

• size
• interconnectedness
• substitutability/financial institution infrastructure
• complexity
• cross-jurisdictional activity

2.2 Firms submit data across these categories to produce an overall score of systemic importance. This score is used to allocate each firm to a bucket, with a corresponding level of capital buffer requirements. This exercise is carried out on an annual basis. The PRA, as a BCBS member, contributes to this annual exercise.

2.3 The UKTS sets out the methodology that the PRA follows to identify and set a capital buffer for UK headquartered G-SIIs. This CP sets out the PRA proposals to update the UKTS to align it with the updated BCBS framework.

2.4 In line with changes introduced to the BCBS framework, the updates to the UKTS would entail:

• Adding ‘trading volume’ as a new indicator under the ‘substitutability/financial institution infrastructure’ category. The trading activities of banks sustain market liquidity, which enables price discovery and permits market participants to manage a wide variety of financial risks. Disruptions to market liquidity can lead to a dislocation of asset prices, which can put pressure on market participants’ balance sheets and result in adverse feedback loops (eg preventing market participants from raising capital). Adding this indicator to the G-SII framework ensures that the risk of disruption to trading is captured in firms’ scores.
• Updating indicator weights for the ‘substitutability/financial institution infrastructure’ category. With the addition of the new 'trading volume’ indicator, the score for this category would no longer be calculated as a simple average, but replaced with a weighted average. The new indicator for ‘trading volume’ is complementary to the existing indicator capturing underwriting activity.^{footnote [5]} Trading volume is designed to capture potential disruptions in the provision of liquidity in the secondary market for some exposures, while the underwriting indicator captures liquidity in the primary market. As a result, it is proposed that the weighting for the underwriting indicator would be halved, with the new indicator for trading volume making up the other half. The other two indicators^{footnote [6]} under this category would maintain their current weighting. The move to a weighted average would maintain the relative importance of the different factors assessed under this category.
• Adding insurance subsidiaries to data consolidation for several indicators.^{footnote [7]} Incorporating the activities of insurance subsidiaries of banking groups better captures the loss given default of banking groups. Consequently, the proposal should reduce the potential for regulatory arbitrage by both moving activities from banking groups into their insurance subsidiaries and reflecting some of the systemic risks stemming from the insurance business.
• Deleting transitional provisions for initial implementation in 2015. These provisions are no longer relevant, so we propose deleting them to simplify the UKTS.

PRA objectives analysis

2.5 Identifying and setting an additional capital buffer for UK headquartered G-SIIs in accordance with the BCBS methodology developed at international level advances the PRA’s primary safety and soundness objective. It does this by helping to ensure G-SIIs hold appropriate levels of capital, in line with the greater costs of their distress or failure to the financial system and economy. The BCBS methodology is regularly monitored and reviewed by BCBS in order to ensure that it remains appropriate in light of: (a) developments in the banking sector; (b) progress in methods and approaches for measuring systemic importance; (c) structural changes; and (d) any evidence of material unintended consequences or material deficiencies with respect to the objectives of the framework. The PRA, as a BCBS member, contributes to the monitoring and review of the BCBS methodology. An updated BCBS methodology was implemented in 2022. The PRA considers it appropriate to reflect these updates in the UKTS.

2.6 The PRA considers that updating the UKTS to align it with the updated BCBS framework would be consistent with its secondary competition objective. The application of the BCBS framework enhances competition by enabling the PRA to identify and apply enhanced capital buffer requirements to those firms with the greatest potential impact on the UK and global financial system, and by ensuring that the same standards are applied to UK headquartered firms as to their overseas competitors.

2.7 The PRA also considers that this alignment would be consistent with the new secondary competitiveness and growth objective introduced by the Financial Services and Markets Act 2023. Under the terms of this objective, actions taken in pursuit of this objective should be subject to aligning with relevant international standards. The proposed update to the UKTS to reflect updates that have been made to the BCBS framework would advance the international competitiveness of the UK economy by ensuring that UK headquartered firms are, with respect to G-SII identification and buffers, subject to the same standards as firms headquartered elsewhere.

Cost benefit analysis (CBA)

2.8 The PRA considers that updating the UKTS to align it with the updated BCBS framework provides benefits in the form of clarity to firms and avoids the incurrence of any duplicative operational costs for firms and the PRA that could arise from a divergence of the UKTS from the BCBS framework.

2.9 The PRA does not consider there would be any costs associated with updating the UKTS to align it with the updated BCBS framework, as firms already report and disclose these data.

‘Have regards’ analysis

2.10 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

1. The principle that a burden or restriction which is imposed on a person should be proportionate to the benefits which are expected to result from the imposition of that burden (FSMA regulatory principles): The PRA considers that aligning the UKTS with the BCBS framework would avoid the incurrence of any duplicative operational costs for firms.

2. Growth (HMT recommendation letters), and sustainable growth (FSMA regulatory principles): The identification of UK G-SIIs supports the international exercise assessing firms’ systemic importance on a global level. Aligning the UKTS with the BCBS framework would be consistent with maintaining a regulatory regime that is open to international business, predictable and transparent, helping to instil trust and confidence in the UK as a place to do business.

2.11 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this proposal, it is because the PRA considers that ‘have regard’ to not be a significant factor for this proposal.

Impact on mutuals

2.12 The PRA considers that the impact of the proposed changes on mutuals is not expected to be significantly different from the impact on other firms. This is because the criteria applied under the updated methodology do not distinguish between mutuals and non-mutuals; this is independent of whether the cohort of UK G-SIIs contains mutuals and/or non-mutuals.

Equality and diversity

2.13 The PRA considers that the proposals do not give rise to equality and diversity implications.